Relevance: GS III (Indian Economy – Investment Models) & GS II (IR – India-China) | Source: The Hindu / Economic Survey

1. The Context: A Strategic U-Turn?

The Ministry of Finance is reportedly considering scrapping the strict curbs on Chinese companies bidding for government contracts.

• The Background: These restrictions were imposed via Press Note 3 (2020) following the Galwan Valley clashes to prevent “opportunistic takeovers.”
• The Trigger: The Economic Survey 2023-24 argued that to boost India’s exports to the West, we must integrate into global supply chains—which are currently dominated by Chinese components.

2. The Argument: “To Compete, We Need Them”

• The “Vietnam Model”: Countries like Vietnam boosted their exports to the US by allowing Chinese manufacturers to set up shops locally. They used Chinese capital/tech to make products for the world.
• Supply Chain Reality: You cannot replace China without using Chinese parts. India wants to become a global manufacturing hub (“China Plus One”), but it currently lacks the domestic ecosystem for components (e.g., for smartphones or EVs). Investing in Chinese joint ventures could fill this gap.

3. The Data: The Investment Freeze

• Sharp Drop: Since the 2020 curbs, China’s share in India’s total FDI inflows crashed from 0.43% (Rank 20) to just 0.01% (Rank 49) by 2025.
• The Opportunity Cost: While Chinese share in US smartphone imports fell (from 60% to 22%), India could not fully capture this vacuum because it lacked the component ecosystem that Chinese firms provide.

4. Structural Challenges

• Indirect Routing: Official data undercounts Chinese money because much of it comes through tax havens like Hong Kong or Cayman Islands.
• Investor Trust: Even if curbs are removed, Chinese firms may be hesitant to invest due to the “unpredictable” policy environment and past losses (e.g., cancelled contracts).

UPSC Value Box

Q. With reference to Foreign Direct Investment (FDI) policy in India, consider the following statements:

1. Prior government approval is mandatory for FDI from any country that shares a land border with India.
2. The “China Plus One” strategy refers to China’s policy of investing in at least one foreign country for every domestic project.
3. Currently, Foreign Direct Investment is prohibited in the manufacturing of atomic energy.

Which of the statements given above is/are correct?

(a) 1 only

(b) 1 and 3 only

(c) 2 and 3 only

(d) 1, 2 and 3

Correct Answer: (b)